Grinding Recovery

Slow economic improvement makes it tough to value assets

By Andy Meek

Michael Drury is watching the current U.S. presidential season with a combination of professional detachment and an air of resignation.

Detachment, because part of his job as chief economist at Memphis-based McVean Trading & Investments is to keep abreast of what makes economies around the world tick. Part of that, of course, means at least some degree of focus on the man – or, possibly a few months from now, the woman – who sits astride the dominant global economy.

MICHAEL DRURY

The resignation felt by Drury – who at the time of this writing had just returned to Memphis after a trip to China – is a result of what he feels is the likely outcome of one of the wildest presidential races in recent memory.

“I think the thing that’s very interesting is there are five teams on the field,” Drury says. “There’s Trump, who’s got the angry white men who are 55-plus and see the world passing them by. A lot of them have lost jobs. They’re not getting retrained. There’s a lot of reasons for it – that’s his group.

“Bernie’s got the kids who are angry because they don’t have prospects. They’ve got student debt. They’re paying into a Social Security system they don’t except to get money from. They’re angry, too. Hillary’s got the women, blacks, Latinos – all the minorities, and they don’t feel they’ve gotten their fair share. Cruz has what’s left of the tea party – the hard right – and they still don’t think the world’s going right. And then, I guess, there’s Kasich.”

Each of those groups, Drury continues, commands the loyalty of 20 percent to 25 percent of U.S. voters, with little to no overlap between them. What Drury expects the contest to produce is a win for Hillary Clinton.

Which would leave us, he says, pretty much where we are right now. With a president, for example, who can’t do as much as they’d like to, legislatively, because of an unyielding opposition party that’s still entrenched.

Michael Drury, chief economist at Memphis-based McVean Trading & Investments, says the presidential election outcome will be a non-factor in this slow-growth U.S. economy.

(AP Photo/Richard Drew)

Why that matters to an economist like Drury:

“The disappointment in that is that what the U.S. needs is to get off monetary policy and on to fiscal policy,” says Drury, who’ll be the keynote speaker at The Daily News’ Money & Markets seminar on Thursday, May 5, at the Memphis Brooks Museum of Art, 1934 Poplar Ave.

“Fiscal policy requires an active legislature. We don’t have one. And it doesn’t look like we’re going to get one. I’m not in the ‘what-I-want-to-be’ business. I’m in the ‘is’ business. And I have to plan what I think is going to happen based on what I think will happen.”

His outlook – part of which he’ll share at the seminar, which will also include a discussion with a panel of local finance industry leaders – lines up more or less with where we are now.

“I think that still leaves you in a slow U.S. growth environment, with a Fed that’s cautious about raising interest rates because it’s not going to get offsetting fiscal stimulus that would let it raise rates,” Drury says. “That leaves the world in an environment where the Fed is probably easier for longer than had been anticipated.

“You used to have really deep recessions and V-shaped recoveries. Now you have deep recessions and very slow, grinding recoveries that can go on for virtually forever. And that’s kind of where we are.”

He’s the founder and president of Century Wealth Management in Memphis, a career path that came about after he’d spent years in the music business. He founded Century Wealth Management in 2000.

One of the concerns that’s outside of his control which he and his firm think a lot about is “the lower expected returns of financial assets going forward,” he says, “and how we navigate that period back to normalization.”

Continues Healy, “It’s driven by Federal Reserve policy and the very, very low yields in the bond market and what that has done to valuations in the stock market and real estate market where valuations have become higher over time to reflect a lower expected return going forward.”

His firm, which manages about $200 million and has about 50 clients, is sponsoring the Money & Markets seminar, along with Financial Federal. Healy is scheduled to be joined on the panel by financial adviser Amy Koch of Wunderlich Securities, and Kent Wunderlich, the chairman, CEO and general counsel of Financial Federal.

They’ll give attendees plenty to think about when it comes to the economy, credit markets, where and how to put money to work and what influence policymakers have on the economy.

The event gets started at 3:30 p.m., with a question-and-answer session between the audience and panelists at the end. A wine-and-cheese reception will follow.

Drury’s keynote will set the tenor of the discussion, as will recent events.

When Federal Reserve policymakers met in March, for example, the minutes of that meeting showed that “several participants also argued for proceeding cautiously in reducing policy accommodation because they saw the risks to the U.S. economy stemming from developments abroad as tilted to the downside or because they were concerned that longer-term inflation expectations might be slipping lower.”

The Federal Open Market Committee decided on April 27 to leave interest rates unchanged, noting in its statement that “economic activity appears to have slowed” since its March meeting even as “labor market conditions have improved further.”

One prediction from Drury – interest rates keep coming down, to the advantage of entrepreneurs who may be able to power the economy forward.

“But it’s a very Japanese situation,” he said, alluding to the slow period in 1990s Japan sometimes referred to as that country’s “Lost Decade.” “And people go, ‘Oh God, that’s terrible.’ But I’m like, ‘Have you ever been to Tokyo? If that’s what a country looks like after 25 years of recession, I’ll take it.’

“It’s not booming growth. But it’s a very nice place. I think that scenario comes about from the entrepreneurs who can keep growth going. Because all the other stakeholders – labor, capital, government – all shrink and make it possible for the entrepreneurs to continue expanding the economy. It’s a deflationary boom. Prices go down, and everybody can afford more.”

Given that his firm’s home base is Memphis, Drury will also be able to talk about Memphis from an economic view as well. A few high-level takeaways from him:

Memphis is what he refers to as a “late-cycle city.” That means, he says, that things usually have to get better everywhere else in the U.S., and then labor costs get so high that companies decide to put some of that back office down in Memphis.

“The risk for Memphis is that back office no longer has to stay in the United States, and it’s just as easy to put it in Ireland and Vietnam or Kenya,” Drury says. “So we’re missing part of the upside. We’re starting to see the global economy do better, which is good for us because we’re a distributive economy. A little pickup in global demand goes a long way for Memphis.”

Still, that leads to another point he stresses, which might sound counterintuitive: To an economist like him, “there’s no such thing as a local economy.”

“Most of the decisions are being made by multinational corporations that decide where to put facilities – their factories, their back office, their headquarters, where to pay their taxes, where to manufacture, where to do everything based on tax laws and regulatory structures all around the world,” Drury says. “There’s almost no state economies or regional economies or national economies, because we’re all subject to globalization now. It’s just a matter of how much you can hide from it.”